Business dispute costs have doubled in a decade
More than 1 in 5 businesses have been involved in a dispute in last 5 years.
Australian small businesses are paying over $130,000 on average for dispute resolution, according to a report released today by Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman.
The report, titled "Access to Justice: Where do small businesses go?", found costs are double what they were 10 years ago, with more than 1 in 10 businesses deciding against escalating a dispute as they could not afford it.
22% of businesses said they had been involved in a dispute in the last 5 years and 44% of disputes related to payment issues, according to the 1,600 businesses surveyed: 26% because the full amount was not paid and 18% because the payment was late.
More than 90% reported that they will talk to the other party before escalating the dispute, 62% reported that they first sought legal advice from a lawyer and 18% confirmed they sought advice from another business owner.
Of the businesses that used formal resolution pathways, only 60% agreed the dispute was dealt with fairly and 50% suggested the time and effort required in the process was unreasonable. Two-thirds of business relationships involved in a dispute also ended as a result of the dispute.
Yanir Yakutiel, founder and CEO of small business lender Lumi, says the report shows that the current system is hurting small businesses. "The system is stacked against the small guy. The costs of dispute resolution, whether legal or by alternative means, are prohibitive to small businesses. Most industries are totally unregulated and don’t offer consumers the opportunity to hold their suppliers or customers to account," he said.
For businesses already struggling with cash flow and time management, the cost of dispute resolution can be excessive. According to the report, 1 in 3 disputes were not escalated through a formal process, with 15% of these cases due to the expected costs being higher than the potential gain and 11% because the business did not have time to follow up on the dispute.
According to Yakutiel, the industry needs to address these issues through new dispute resolution processes. "It would be good to see more industries adopt mandatory dispute resolution mechanisms that are enforceable on the relevant parties. The SME lenders have recently launched a code of conduct that gives customers access to external dispute resolution system," he said.
The flaws in the current dispute resolution process also reflect a wider industry problem around cash flow, says Yakutiel. "Business owners are focused on running and growing their business, what ever that may be. These businesses don't typically have a finance function. Moreover, they are working on a tight cash flow cycle and not having the cash when required may result in the business becoming insolvent. Most businesses fail due to solvency not profitability."